Capital Commitment
The total amount an investor promises to contribute to a Category III AIF over the life of the fund — at least Rs 1 crore, or Rs 25 lakh for employees and directors of the AIF or its Manager.
In plain language
An investor in a close-ended Category III AIF does not usually hand over the whole amount on day one. Instead it signs a promise: "I will put in up to this much, as and when you call for it." That promise is the capital commitment.
The workbook defines it as the total funds to be contributed by investors for subscription to the Category III AIF during the life of the fund. Each investor's commitment depends on its own allocation to the fund, so an institution and an individual in the same scheme can commit very different sums.
Why structure it this way? The workbook's answer: a commitment gives the manager certainty of funds, so investments can be planned, while the money is only called up — through drawdowns — when there is something to invest in.
How it works
Minimums under the SEBI (AIF) Regulations, 2012
| Rule | Figure |
|---|---|
| Minimum commitment from an investor | Rs 1 crore (not applicable to accredited investors) |
| Minimum from employees or directors of the AIF or of the Manager | Rs 25 lakh |
| Minimum corpus of each scheme (total of commitments) | Rs 20 crore |
| Sponsor or Manager continuing interest | 5% of corpus or Rs 10 crore, whichever is lower |
| Maximum investors per scheme | 1,000 |
Joint investors. An investor with a spouse, parent or child may invest jointly, with not more than 2 persons acting as joint investors. Any other joint arrangement needs Rs 1 crore from each investor.
Open-ended schemes. The first single lump-sum investment must be at least Rs 1 crore; later additions have no minimum, and a partial redemption cannot leave the investor below Rs 1 crore.
Commitments that do not count yet. A manager may sign the contribution agreement with an investor whose accreditation certificate is still pending, but that commitment is not included in the corpus until the certificate arrives, and no money may be received from that investor until then.
Partly paid-up units represent the portion of committed capital the investor has actually invested. The commitment period, specified in the investment agreement, is the window in which the manager calls it up.
A worked example
Illustrative figures. Tungabhadra Absolute Return Fund – Scheme I, a close-ended Category III AIF, gathers commitments:
| Investor | Commitment |
|---|---|
| Iyer Family Office | Rs 18 crore |
| Deccan Insurance Ltd | Rs 30 crore |
| 11 HNIs at Rs 1 crore each | Rs 11 crore |
| 4 employees of the Manager at Rs 25 lakh each | Rs 1 crore |
| Corpus | Rs 60 crore |
Sponsor commitment. 5% × Rs 60 crore = Rs 3 crore, against the Rs 10 crore alternative. The lower figure applies: Rs 3 crore, invested in cash, not by waiving management fees.
A rejected application. Mr Kulkarni, not an accredited investor and not an employee, offers Rs 80 lakh. Below the Rs 1 crore minimum — the fund cannot accept it.
First drawdown. The manager calls 40% of commitments:
Fund-wide call = 40% × Rs 60 crore = Rs 24 crore
Iyer Family Office pays 40% × Rs 18 crore = Rs 7.2 crore
Still committed but uncalled for Iyer = Rs 18 crore − Rs 7.2 crore = Rs 10.8 crore
A voting wrinkle. Deccan Insurance has committed Rs 30 crore — exactly 50% of the corpus. If the fund wants to buy securities from Deccan, it needs approval of 75% of investors by value, and Deccan itself is excluded from that vote.
Why NISM asks about it
Chapter 3 (Introduction to the Category III AIF Ecosystem) introduces capital commitment and sponsor commitment together at 3.3.2, and its sample question asks for the sponsor's minimum commitment. Chapter 5 (Regulatory Framework) carries the investment conditions — Rs 1 crore, Rs 25 lakh, Rs 20 crore corpus, joint investors, the open-ended lump-sum rule and the accredited-investor carve-outs. Chapter 6 uses committed capital as the starting point of every fee and performance example. Expect number-matching questions and at least one "whichever is lower" trap.
Common exam traps
- Commitment is not contribution. Committed capital is the promise; invested capital is what has been drawn down. In the workbook's own illustration, Rs 1,000 crore committed with Rs 650 crore drawn.
- Corpus means total commitments, not money received.
- The Rs 1 crore minimum does not apply to accredited investors, and Rs 25 lakh applies only to employees or directors of the AIF or its Manager.
- Sponsor commitment is the lower of 5% and Rs 10 crore, and it cannot be met by waiving fees.
- A pending accreditation does not count toward corpus.
- Management fee base — the workbook is inconsistent. Chapter 3 (3.3.7.2) says management fee usually ranges between 1% and 2% of the capital committed during the commitment period; Chapter 6 states that Category III management fees are not charged on committed capital but on Gross NAV. For fee computations follow Chapter 6, and be ready for either statement in a definitional question.
Check yourself
1.A Category III AIF shall not accept from an ordinary investor a capital commitment of value less than:
- a)Rs 25 lakh
- b)Rs 50 lakh
- c)Rs 1 crore
- d)Rs 20 crore
Show the answer
Answer: (c) Rs 1 crore
The minimum capital commitment from an investor in a Category III AIF is Rs 1 crore, and this minimum does not apply to Accredited Investors. Rs 25 lakh is the reduced minimum for employees or directors of the AIF or of the Manager. Rs 50 lakh is the PMS minimum. Rs 20 crore is the minimum corpus for the scheme, not the minimum from a single investor.
2.A Category III AIF scheme has total capital commitments of Rs 1,000 crore and has drawn down Rs 650 crore. The undrawn amount of Rs 350 crore is known as:
- a)Invested capital
- b)Dry powder
- c)Corpus
- d)Reserve capital
Show the answer
Answer: (b) Dry powder
The undrawn amount is dry powder. Invested capital is the Rs 650 crore actually drawn down by the manager for making investments, as against committed capital of Rs 1,000 crore. Corpus is the total of capital commitments raised — the Rs 1,000 crore figure itself.
3.At the offshore level, which document sets out the investor's capital commitment and records the investor's representations and warranties, such as being qualified under law and 'fit and proper' to invest?
- a)Contribution Agreement
- b)Investment Management Agreement
- c)Subscription Agreement
- d)Indenture of Trust
Show the answer
Answer: (c) Subscription Agreement
Among the offshore-level documents, the Subscription Agreement "sets out the terms and conditions on which an investor will subscribe to the securities issued by an offshore fund". It "sets out the investor's capital commitment to the fund and also records the representations and warranties made by the investors, such as the investor being qualified under law and declared as 'fit and proper'". The Contribution Agreement (a) does a similar job onshore, between the investor and the domestic fund. The Investment Management Agreement (b) is how the trustee appoints the manager. The Indenture of Trust (d) establishes the trust and whether it is determinate or indeterminate.
Where this is taught
- Series XIX-B · Chapter 3: Introduction to Category III AIF Ecosystemintroduced here
- Series XIX-A · Chapter 3: Concepts in Alternative Investment Funds Industryintroduced here
- Series XIX-C · Chapter 7: Alternative Investment Funds Ecosystemintroduced here
- Series XIX-E · Chapter 5: Alternative Investment Fund Ecosystemintroduced here
- Series XIX-D · Chapter 4: Alternative Investment Funds Ecosystemintroduced here
Related terms
- Category III AIFThe AIF category for funds running diverse or complex trading strategies with leverage — hedge funds and their kin — and the only category denied tax pass-through status.
- Accredited InvestorAn investor certified by an accreditation agency as meeting SEBI's income or net-worth tests, and therefore allowed into products on relaxed terms — including below the Rs 1 crore AIF floor.
- Continuing interestThe sponsor's or manager's own money locked into the fund — 2.5% of corpus or Rs 5 crore, whichever is lower, for Category I and II AIFs, and 5% or Rs 10 crore for Category III.
- CorpusThe total of all capital commitments raised by a Category III AIF scheme from its investors — not the cash actually collected, which SEBI requires to be at least Rs 20 crore.
- DrawdownThe process by which the manager of a Category III AIF calls committed capital from investors as the fund needs it — also known as a capital call.
- PIC MultiplePaid-in capital divided by capital commitments — how invested a fund is. A PIC of 0.80 means 80% of commitments have been called; a high PIC means the drawdown phase is nearly over.
- Contribution AgreementThe agreement between one investor, the trustee and the investment manager that sets the terms on which that investor participates in the AIF — the contract that turns a commitment into units.
- Commitment PeriodThe window in a closed-ended fund during which the manager may call capital against commitments — and the period over which management fee is charged on committed rather than invested capital.
- Final CloseThe date that ends fund-raising for a Category III AIF scheme — after it, a close-ended scheme accepts no new investors, and only then may its units be listed.
- In-principle ApprovalA SEBI approval granted to an eligible AIF applicant before its trust or partnership deed is registered — the deed must then be registered within 6 months, and no investor money may be called until registration.
- Invested CapitalThe total amount a Category III AIF's manager has actually drawn down from investors to make investments, as against the larger capital they committed. The undrawn balance is dry powder.
- Dry PowderThe part of a Category III AIF's capital commitments that investors have promised but the manager has not yet called — committed capital still waiting on the sidelines.
- Over-commitment StrategyA deliberate cash-management approach where an institutional investor commits to more Category III AIFs than its current cash could cover if every capital call landed at once.
- Set-up CostThe one-time cost of forming the fund and issuing its units, charged to investors as a percentage of capital commitments — up to 1.5% or 2.5% — and usually amortised over the first 36 months.
- Blind poolA fund in which investors commit capital to the pool rather than to named deals — the manager chooses the investments afterwards, which is why the subscription agreement must settle everything in advance.
- Total Value to Paid-in CapitalA fund's investment multiple: cumulative distributions plus the residual value of unsold investments, divided by paid-in capital — equivalently, DPI plus RVPI.
- Default in DrawdownThe event of an AIF investor failing to pay a capital call. Other investors take up the call, and the defaulter substantially loses rights and returns under the investment agreement.